David Rotfleisch on How are "Catastrophe Bond" Losses Taxed?

Hurricane Melissa Expected to Activate Jamaica’s $150 Million Catastrophe Bond to Support Rebuilding

Over the last decade, Jamaica has developed a multi-tiered disaster risk financing system to protect the country from natural disasters. That framework is now being put to the test after Hurricane Melissa swept across the island, causing extensive damage to homes, roads, and essential infrastructure. In 2023, Jamaica issued a $150-million USD catastrophe (“cat”) bond intended to pay out when certain hurricane intensity and trajectory thresholds are reached. According to Florian Steiger, CEO of Icosa Investments, those conditions have now been met, triggering a payout that could provide much-needed funds within days.

In addition to the cat bond, Jamaica is part of a regional insurance pool that offers protection against extreme rainfall and tropical storms, and it has pre-arranged credit lines with both the World Bank and the Inter-American Development Bank. Collectively, these tools give the country quick access to emergency financing when disaster strikes.

Experts, including Conor Meenan of the Centre for Disaster Protection, consider Jamaica’s disaster financing system among the strongest globally. The Finance Ministry estimates that approximately $820 million USD can be accessed immediately after a major event—an amount that won’t cover total losses but is vital for quickly restoring critical services like transportation, healthcare, and telecommunications. Jamaica’s forward-thinking strategy offers a potential blueprint for other climate-vulnerable nations aiming to rebuild faster and more resiliently after natural disasters.

Catastrophe Bond Explained

A catastrophe (Cat) bond is a type of financial instrument that provides insurers with funds only when a defined disaster occurs. Its main function is to shift disaster-related risks from insurance companies to investors, who are compensated with higher interest rates than those offered by typical fixed-income products, as explained by Investopedia. If a qualifying disaster triggers the bond, the insurer may stop or eliminate repayments of principal to investors.

Cat bonds first appeared after 1992, following one of the most difficult periods for the U.S. property and casualty (P&C) insurance sector. Hurricane Andrew—at the time the most expensive hurricane in U.S. history—pushed several insurers toward insolvency. This crisis drove the development of innovative financial risk-transfer solutions, including Cat bonds. In 2025, TD Insurance issued a $150 million Cat bond, becoming the first company in Canada to do so.

These Cat bond transactions introduce several regulatory considerations. Unlike the United States, which has established specific legislation in response to the growing use of Cat bonds, Canada has no dedicated regulatory framework for these instruments—likely due to limited demand for insurance securitization.

Nevertheless, existing Canadian rules still apply, particularly those governing capital and reserve credit for reinsurance (or retrocession) involving offshore reinsurers. This framework typically relies on mechanisms such as reinsurance security agreements, funds withheld arrangements, or letters of credit. These rules matter because Cat bond structures commonly involve a sponsor entering into a reinsurance or financial contract with an offshore special purpose vehicle.

A critical regulatory question is whether the arrangement achieves true risk transfer. Non-indemnity Cat bond structures can create “basis risk”—the possibility that the payout triggered by the bond does not align with the sponsor’s actual losses. This issue directly affects whether capital and reserve credit will be granted under Canada’s reinsurance regulations.

Tax Pro Tip: How Catastrophe Bond Losses Are Taxed in Canada

In Canada, losses incurred from catastrophe bonds are generally considered capital losses for tax purposes. Such losses may be used to offset capital gains in the current year, any of the three previous years, or carried forward indefinitely to offset future capital gains. They cannot normally be applied against other forms of income, like wages or interest.

Frequently Asked Questions (FAQs)

What exactly is a catastrophe (cat) bond?

A catastrophe (cat) bond is a financial tool that enables insurance or reinsurance companies to shift disaster-related risks—like hurricanes or earthquakes—to investors. In return for taking on this risk, investors earn higher interest payments, but they may forfeit part or all of their principal if a specified catastrophic event occurs. If the event does not occur, investors receive their full principal at the bond’s maturity.

How are losses from catastrophe bonds treated for tax purposes in Canada?

Generally, losses from catastrophe bonds are treated as capital losses for tax purposes in Canada. These losses can be carried back up to three years or carried forward indefinitely to offset future capital gains.

DISCLAIMER:

This article is intended for general informational purposes only and reflects the law as of the date of posting. It has not been updated and may no longer be current. The content does not constitute legal advice and should not be relied upon as such. Each tax situation is unique and may differ from the examples discussed. You should consult a qualified Canadian tax lawyer for advice tailored to your circumstances.